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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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May 07, 2015


All Eyes on the Consumer

It appears that the first quarter may have been even worse than we thought. The CNBC rapid update—consensus estimates from a panel of forecasters—registered a decline of 0.3 percent as of yesterday.

Clearly, the year didn't start out so well, but here at the Atlanta Fed we have not yet lost faith. We are sticking to the narrative that 2015 will be another solid year of recovery.

That said, our faith is not blind and, befitting data-dependent policymakers, we need to make some call about what it will take to shake our confidence. In a speech delivered yesterday (May 6) in Baton Rouge, Louisiana, Atlanta Fed President Dennis Lockhart pointed to our current lodestar:

As I assess the possible and necessary contributors to a rebound in the second quarter and thereafter, attention has to fall on consumer spending, in my view.

Is there a case for optimism? We think so, and it is based on the assumption that the fundamentals supporting consumer spending have been stronger than the actual recent pace of expenditures. President Lockhart continues:

What's up with the consumer? It's puzzling. The fundamentals supporting consumption growth seem strong. I consider consumer fundamentals to be real personal income growth, household wealth, access to credit, and consumer confidence. Consumer confidence is, in turn, highly influenced by the broad employment outlook.

To be more precise about that sentiment, the chart below illustrates an experiment based on a simple model that incorporates President Lockhart's description of "fundamentals." To be even more precise, we ask the following question: What would we have predicted for consumer spending growth during the past four months based on the history of actual consumer spending and its relationship to income, employment (and unemployment), confidence measures, and wealth (specifically, equity prices)? We also threw inflation and oil prices into the mix for good measure.

Here's what we got:

Real Personal Consumption Expenditures

In other words, the "fundamentals" suggest the four-month annualized growth of consumer spending should have been in excess of 4 percent, as opposed to the approximately 1.5 percent we actually saw. That is a story we don't expect to persist, and our current view of the year is that first-quarter consumer spending results are not indicative of future performance.

Consumers are, of course, a forward-looking bunch, and it is possible the recent weak spending reflects a looming reality not captured by the simple model described above. But our forecast for now is that consumers will move to the fundamentals, and not vice versa.

As President Lockhart said in Louisiana: "Stay tuned."


May 7, 2015 in Economic conditions , Forecasts | Permalink

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" What would we have predicted for consumer spending growth during the past four months based on the history of actual consumer spending and its relationship to income, employment (and unemployment), confidence measures, and wealth (specifically, equity prices)? We also threw inflation and oil prices into the mix for good measure."

Over what "history" was the model developed ? If it was over , say , the last five years it might be expected to provide a reasonable forecast , but aggregating over a longer period - one that precedes the crisis - would be problematic.

What about new credit and debt burdens and/or debt service of consumers ? Surely we've learned by now that these are crucial to understanding the evolution of consumer spending.

Posted by: Marko | May 07, 2015 at 06:00 PM

BTW , one only has to look at your recent graph of spending by type to see the effect of credit on spending :

https://www.frbatlanta.org/research/-/media/C7B00E5056E74D2CB7F7DD9399DD0BD6.ashx

The only category that is equaling or exceeding the growth rates of the early 2000s is durables , reflecting the healthy growth in auto sales since the crisis. This has been achieved only by permitting substandard lending practices - boosted by dealer kickback incentives for promoting higher-cost loans. In other words , subprime 2.0.

Is this how we grow nowadays - looser and looser lending at lower and lower rates ?

Maybe we should aim for an income-based consumption model , rather than one that requires ever-increasing household leverage.

Posted by: Marko | May 07, 2015 at 06:17 PM

The Fed as well as other analyst in the financial markets would be wise to anticipate the logical impact of consumer spending as it is bound to GDP growth, which is what is mainly is made up of. Logical in a sense that low energy prices would justify more cash for small businesses and consumers to spend more.

Posted by: omar alexander | May 10, 2015 at 09:00 AM

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